Question

Show the time line and key steps of one method. 1. A new 8%, 5-year bond pays interest annually and yields 6% (YTM). If this YTM remains unchanged, calculate the price of this bond one year from now. If Megan has held this bond over one year, calculate the total return of her 1-year bond investment 2. A new 3-year, 6% annual-coupon bond was just issued. If the market interest rate is 8%, (a) calculate the duration of this bond, (b) calculate the modified duration (volatility) of this bond, and (c) explain what the calculated volatility means 3. If the current YTM on a 1-year bond is 6% and we expect the YTM on the 1-year bond 1 year from,now is 996, (a) calculate the current YTM on a 2-year bond and (b) determine the shape of the yield curve 4. Suppose the U.S. Treasury just issued 6%, 10-year annual-coupon TIPS (Treasury Inflation- Protected Securities) at a price equal to its face value of $1,000. If the CPI (Consumer Price Index) rises by 2% in the first year, calculate the annual coupon payment at the end of Year 1 5. Chris requires a 10% return on an investment. If he expects inflation to be 2% in the coming year, calculate the expected real return on the investment. 6. As a strategist in a bond mutual fund, you are in charge of researching and recommending bond investments to the fund manager. Suppose you expect the FOMC will raise the key interest rate in the upcoming meeting on September 25-26. You are thinking about investing in one of the following three Treasuries: Treasury A has a duration of 3.5; Treasury B has a duration of 4; Treasury C has a duration of 5. If the appropriate discount rate is 1%, which Treasury would you choose to buy or short (i.e., do short-selling)? Why? FOMC (Federal Open Market Committee) is the branch of the U.S. Federal Reserve that determines the course of monetary policy. FOMC announcements inform everyone about the US Federal Reserve's decision on interest rates and are one of the most anticipated events on the economic calendar (for USD and USD pairs)

Answer 1

1)

Yield to maturity is the annualized return earned on the bonds over the life bond if other things remain unchanged after purchasing the bond. Bond prices changes accordingly to yield the YTM to investor consistently over period of maturity.

Hence, total return for 1-year is 6%.